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Global trade wars will cause major disruptions

By DM Deshpande

Trade wars between two largest nations the U.S and China almost a year old now, are all set to turn bitter. Failure of talks on May 10th resulted in the US increasing the tariffs on US $200 billion worth of imports from China from 10 per cent to 25 per cent.

On the remaining US $300 billion worth imports there is a distinct possibility of extension of this hike. There is just a slimmer of hope should the two countries arrive at some ‘deal’ before the two leaders meet in Osaka for G20 next month that the threat may not be carried out.

It is important to remember that previous eleven rounds of talks led by the Chinese Vice -Primier, Liu have failed to reach any deal. Given the political posturing and both sides being apprehensive about ‘loss of face’ it is not going to be easy for any settlement now or even in the foreseeable future.

China too has retaliated, though not aggressively, by hiking tariffs ranging from 5 to 25 per cent on US imports worth US $60 billion. This is despite the  warning from the Trump administration. China has said that it’s retaliatory measure are in terms of ‘respect and dignity’. This is likely to hit the farm exports but the US is likely to extend the farm subsidies and the Fed is most likely to reduce interest rates.  

China’s ability to retaliate with punitive tariffs is limited. Its imports are just around US $120 billion, of which China has already imposed higher duties on imports worth US $110 billion. But it has other options. It is holding large amounts of US treasuries. If it decides to offload even some of its dollar holdings, it will have a huge impact on global foreign exchange markets.

China may make life difficult for American firms that depend on Chinese market. Already, China is leading the world in high tech in several spheres. Boeing recently got an order from China for supply of 7,500 passenger planes. General Motors sells more cars in China than in the US. Same is true of several other firms such as Apple, Nike, Starbucks, Intel, Telsa and many others.

It does not seem like stopping at trade wars. Trump is taking on EU, Japan and India all at once. He has called India a tariff king. Besides raising duties on steel and alluminium, he has ended trade sanctions for Indian imports of oil from Iran. Unlike other nations, US is not required to earn foreign exchange to pay for its imports. Dollar, as a dominant international currency, is used to pay imports, fund wars and conflicts all around the world. All it has to do is to print more currency.

The privileges enjoyed by US are likely to be resented by several countries. The US has played politics in the matter of international payments through SWIFT (Society for Worldwide Interbank Financial Telecommunication). Time and again, it has threatened to exclude ‘unfriendly’ countries from the purview of using the payment gateway.  Not surprisingly, the EU and others are working on creating an alternative of their own for SWIFT.  

Any escalation in major trade war will have pass over effect on global trade, finance, investment and currency values. India will be affected, without doubt as most other major economies.

Reports suggest that China may lose one per cent of growth due to trade related issues. There is an opinion that we may gain from the disruption caused by warring giants. On balance, while gains may be marginal, losses in terms of uncertainty, flight of capital, inflation may far be far more. It is worthwhile to remember that we are not an economic super power. We do not even figure in US or Chinese calculations with just one-fifth of the size of our economy vis-a-vis that of China.

Private entities will do well to hedge their currency transactions in as many options as they have in the market place. The Government must strive and maintain macro-economic stability, boost domestic growth and allow for continuity of reforms and policies. Capitalise public sector banks in one go instead of doing it in bits and pieces. One major lacuna is the absence of market for long term debt. That needs to be addressed. Public-private partnership initiatives need to be revived and strengthened especially in building smart cities. This can unleash ‘animal spirits’ leading to growth of the economy.

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